IMF: US must avoid big tax jump, spending cuts

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Associated Press

Posted on July 3, 2012 at 10:02 AM

Updated Tuesday, Jul 3 at 12:02 PM

WASHINGTON (AP) — U.S. lawmakers must work quickly to avoid sharp tax increases and spending cuts that could throw the economy into recession next year, an international lending organization said Tuesday.

The International Monetary Fund also warned in its annual report of the U.S. economy that Europe's debt crisis could slow U.S. growth. A recession in Europe would lower profits for large U.S. corporations, pushing down their stock prices.

The IMF forecasts the U.S. economy will grow 2 percent this year and 2.3 percent in 2013, roughly in line with forecasts by the Federal Reserve and private economists.

While that is a weak pace of growth, it is a bit better than last year's 1.7 percent expansion.

But if Congress doesn't do something to prevent the tax increases and spending cuts early next year, the impact could shave 4 percentage points off U.S. growth and result in a recession, the IMF said.

Christine Lagarde, the IMF's managing director, said the impact on the U.S. economy "would be severe with negative spillovers to the rest of the world."

Congress and the Obama administration should take steps to reduce the deficit, Lagarde said, but the cuts should be phased in over time.

Lawmakers should also raise the U.S. government's borrowing limit, Lagarde said. The U.S. is on pace to reach the limit in early 2013. Fierce debate in Congress over whether to raise that limit last August led Standard & Poor's to downgrade long-term U.S. debt.

The IMF also expects little change in the unemployment rate this year, which was 8.2 percent in May. The IMF projects the rate will average 8.2 percent in 2012 and 7.9 percent in 2013.

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